IBT Journal of Business Studies (IBT-JBS)
E-ISSN: 2409-6520; P-ISSN: 2414-8393
Volume 16:, 88-100 (2020)
DOI: 10.46745/ILMA.jbs.2020.161.01
Effect of Risk Management Practices on Banks Performance
Moderating Role of Managerial Expertise as a Competitive Edge
___________________________________________
Received: 13-Jun-2020 | Accepted: 14-Jul-2020
Waqas Ali1* | Shujahat Ali2 | Shahid Mehmood3
Abstract
The main aim of this research study is to determine effect related to risk management practices
on bank’s performance in presence of managerial expertise. Expertise and low overheads known
to be an advantage on competitors in market. In this study, we propose to use the managerial
expertise as competitive force to drive forward the ventures in the industry. Banking known to be
intensely competitive industry in the business globe. It greatly requires the risk management and
performance enhancement managerial expertise. Random method utilized for data collection
through summated scale on five Liker point. Data collected from 70 operational managers,
branch managers, and senior risk managers of the bank. This study utilized reliability analysis,
correlation and regression analysis by using SPSS v.26. Results illustrated that effective risk
management practices significantly influence performance of banks with moderating role of
expertise based on managerial capabilities. This study prone with some limitation foremost
inadequate sample size and cross-sectional study which influences on the generalization of
study, root cause of small sample size is limited number of banks in Azad Kashmir. Moreover,
this study recommends to bankers need to pay attention on risk management practices as well
as managerial expertise to improve performance of banks and achieve competitive advantage
by using that managerial expertise.
Keywords: Risk Management, Managerial Expertise, Bank’s Performance, Risk Management
Practices
JEL Classification: D81, G32, G21, G24, E58
Author’s Affiliation:
Institution: Limkokwing University of Creative Technology1 | Mirpur University of Science and Technology2,3
Country: Malaysia | Pakistan
Corresponding Author’s Email: *waqas.110056108@limkokwing.edu.my
The material presented by the author(s) does not necessarily portray the view point of the editors
and the management of the ILMA University, Pakistan.
2409-6520 (Online) 2414-8393 (Print) ©2020, published by the ILMA University, Pakistan.
This is open access article under the license. https://creativecommons.org/licenses/by/4.0/
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IBT JOURNAL OF BUSINESS STUDIES (IBT-JBS) Volume 16 Issue 1, 2020
1) INTRODUCTION
The past decade’s world is witnessing one of the most shocking financial failures.
The crisis effect was universal hits in all sectors of the worldwide businesses.
The supreme affected sectors are financial sector, especially banking sectors. The
banking sector witnessed not only for dramatic disappearance but also became a
most consistent target for tough regulation’s community anger and academic blame
or criticism. There are many justifications on the root of the current financial
disaster. One factor that is received more attention during the crisis that is risk
management disclosure. It looks like very important tool; which banks use to try to
achieve acceptability by the public and regulators.
The term risk based on financial is uses like an umbrella term in which multiple
risks are linked with financing. It constitutes transactions based on financial
considerations, which include company loans at risk of default (Hassan Al-Tamimi
& Mohammed Al-Mazrooei, 2007). Financial risk management is defined as
maximization of performance and reducing the cost associated with it in the banks.
The behaviors of the bank managers to the risk and corporate governance effect on
the risk-management acuities. Lintner (1975) stated that healthy risk management
framework helped banks to enhance ability to participate in market and reduce
financial exposure. In the current era, the financial risk management involves a
very vital role in operation of banks. All banks are exposed large numbers of risks
considered as credit risk, foreign exchange risk, interest-rate risk and liquidity risk
among others.
It is a very complex task for any financial institution to manage their risks, and
progressively important where economic occasions and economic system are
associated in the world. Most of the banking regulators and financial institution in
the world are emphasized risk management as a basic component of organization’s
long-term success (Pérignon & Smith, 2010). Management should focus on
organization’s ability to find out and manage the future risk for the long-term success
rather than focusing on current, previous, or historical performance. On the point
is no finalized definition of hazard or risk. If we study extensive literature of risk,
then we find concept of risk considered as expected value, possibility spreading, as
an occasion or event. There is following information of risks.
1. The risk is an event or situation, where approximately of values of human is
considered at stake and outcome is said to be uncertain (Aven & Renn, 2009).
2. Risk is ambiguous consequences of occasion or activity related to something
values possessed by human.
Financial risk has only one category of the wide area of risks. Additionally, financial
risk divided into three-subcategories first category is credit risk; second, one is
liquidity risk, and third one is market risk. The third one market risk classified into
four subcategories first one is foreign exchange risk, second is interest-rate risk,
third is commodity risk and forth is equity risk. There is different definition of
financial risk management, some researcher. The financial risk management states
to practice of financial value creation within the firm to manage exposure, market
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IBT JOURNAL OF BUSINESS STUDIES (IBT-JBS) Volume 16 Issue 1, 2020
risk and credit risk by using financial instruments. There are following objective of
current research study.
To determine impact of Risk management practices on bank’s Performance in
presence of Managerial Expertise.
This research study utilized survey method, which provides the objective kind of
information that, studied. Study used summated scale, which measures on five-
point Liker scale. Target population is operational manager of banks, branch
manager, senior risk managers and bank practitioners in the state of Azad Jammu
and Kashmir. Moreover, these bankers belonged to long-familiar banks in the
state. Random sampling technique utilized because of long-familiar population.
These bank’s branches visited August 2018 to September 2018 and distributed 100
questionnaires among managers and practitioners and observed 70 were suitable
filled and useful.
2) LITERATURE REVIEW
Risk management is the process of comprehensive planning, organizing, directing
and controlling funds to accomplished objectives in which unexpected event (Good
or Bad) may happen (Verbano & Venturini, 2013) . The word risk in banking sector,
mostly researchers utilized in research (Gallati, 2003). There are fundamentally
two steps of risk management the one step is an origin of risk identification, and the
second step is to develop a method to solve risk (Rosman, 2009).
The major aims of bank management to enhance shareholder’s return boosting
performance of banks. Banks face different kind of risks such as interest-rate risk,
credit risk, foreign exchange risk, market risk, liquidity risk, operational risk, off-
balance risk, insolvency risk and technology and operational risk (Tandelilin et al.,
2007). The motivation of banks comes from the risk, which can direct to the banks’
loss. The risk-management issue in banking sector has a not only larger impact
on banks but has an also greater impact on growth of economy (Tandelilin et al.,
2007). The recently focused by risk management authority on ensuring regulatory
compliance and developing control variable rather than improving financial results
or outcomes (Vedenov et al., 2006). It is noted that well managed and controlling
the risk can lead to enhance the worth of the firm. Management of financial risk is
to reduce monetary troubles and associated costs.
There is a plethora of studies conducted on financial risk management. The following
research study attempted to summarize results of some related studies. Hassan Al-
Tamimi & Mohammed Al-Mazrooei (2007) founded that banks of UAE are slightly
effective at handling risk identification, understanding risk, risk monitoring and risk
assessment is most central and influence variable in risk-management practices.
This research study also inspected that clear difference between UAE banks and
foreign banks participating in the risk assessment, monitoring and controlling the
risk.
Research study conducted by Rosman (2009) determined that the significant
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IBT JOURNAL OF BUSINESS STUDIES (IBT-JBS) Volume 16 Issue 1, 2020
variance among the risk-management process and risk management practices.
All determinants of Risk Management Process are significantly associated with
Risk-management practices. Furthermore, Khalil & Ali (2015) showed that the
risk assessment and risk analysis, risk management practices and risk analysis has
significantly influence, risk monitoring and risk identification has insignificantly
influenced on risk management practices. Moreover, According to Nazir et al.
(2012) mentioned that Pakistani banks are efficiently performed in risk credit
risk analysis, risk understanding and risk monitoring, Channar et al. (2015)
conventional banks affectively managed risk management process as compared
to Islamic bank, this study also illustrates that the risk management has negative
and insignificant association with operational performance and positive link with
financial performance.
A study illustrated that the influence of URM, RI, RM and RA on risk-management
practices and also explore risks which Islamic banks faced frequently are interest-
rate oriented risk, liquidity risk and operating risk (Khattak et al., 2013; Muhammad
et al., 2018). This is why efficiently management of risk is really essential for the
Islamic banks (Hassan Al-Tamimi & Mohammed Al-Mazrooei, 2007). Additionally,
research study shows that the risk-management process is very essential for banking
sector in Pakistan, this is not necessary for only the regulatory requirements but
also very essential for the performance of the banks (Pulka et al., 2018) concluded
stronger risk management can reduce risk exposure and increase bank’s value
(Ellul & Yerramilli, 2013).
Making decision rely not only on collecting business intelligence but also depends
on the competency of individuals (Lönnqvist & Pirttimäki, 2006). A study illustrated
that managerial expertise significantly positive influence on the organization
performance (Alfayo Bonface 2015).
A study concluded that an organization can achieve his objectives when the
employee of that organization has skills (Panagiotakopoulos, 2012). Managerial
competency defined by Bhardwaj & Punia (2013) is a combination of skills and
knowledge, which is required for the effectiveness of the organization. Researchers
examined that there is positive relation between organization performance and
managerial competency (Hawi et al., 2015; Levenson et al., 2006; Purohit & Shah,
2018; Šparl et al., 2013) also association between managerial competency and
business performance (S. Ali et al., 2013; Veliu & Manxhari, 2017).
Managerial skills defined that the combinations of behaviors, which are very
fruitful for the organizations’ performance without that in many cases managerial
knowledge does not have any effect (Al-Madhoun & Analoui, 2002), capability to
convert info and knowledge into practices (Bharadwaj, 2000). A study examined
there is a positive and direct relationship between managerial skills and bank’s
efficiency (Javadin et al., 2010). Furthermore, a study Rehman & Anwar (2019)
conducted in Pakistan to examine effect of competitive strategies on the performance
with mediating role of ERM practices and found significant direct and indirect
effect. The major limitation was that the ERM practices measure with indicators not
with determinants. The study recommended to increase ERM practices to improve
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IBT JOURNAL OF BUSINESS STUDIES (IBT-JBS) Volume 16 Issue 1, 2020
the organizational performance (Saeidi et al., 2019). Furthermore, study explored
positive and significant impact on performance (Sarfraz et al., 2018; Sleimi, 2020).
Studies also suggested that the ERM practices are compulsory most of the banks in
Nigeria (Dabari & Saidin, 2016).
3) METHODOLOGY
3.1) RESEARCH DESIGN
This is the explanatory study which is based on the theory to test the hypothesis.
Primary data was collected from the banking managers (operational managers,
branch managers, and senior risk manager and bank practitioners). Current study
also employed cross-sectional method due to availability of time and resources
which is also showed valid results (W. Ali et al., 2019; W. Ali et al., 2020).
3.2) SAMPLE SIZE AND METHOD
Current study used the non-probability (pic and drop) sampling method to elaborate
effect of risk management practices on performance of banks in presence of
managerial expertise. The population was unknown and unavailability of sampling
frame the non-probability sampling is quite useful and appropriate. There were
approximately 105 questionnaires collected and 35 were omitted due to missing
values >5% and respondents were not engaging with the questionnaires. The
response rate which is 66.66% was consider enough (Mugenda & Mugenda, 2003),
stated that response rate >50% consider enough and >60% consider good.
3.3) INSTRUMENT SCALE
Self-administrated and adopted questionnaires distributed among managerial
position respondents. However, Questionnaires consists on designation of
respondent and qualification. Second category consists of practices related to risk
management which includes understanding risk identification, risk monitoring and
assessment of risk used (Hassan Al-Tamimi & Mohammed Al-Mazrooei, 2007).
Managerial skills, managerial competency used to measurement of managerial
expertise. Organizational performance measured by financial performance used by
(Zehir et al., 2016) developed by (Baker & Sinkula, 1999; Lynch et al., 2000) and
performance of employees developed by (Fuentes-Fuentes et al., 2004; Rahman &
Bullock, 2005).
3.4) ANALYTICAL TOOLS AND METHODS
Current study utilized the SPSS v. 26 for the data cleaning, screening and analyzing.
Study employed the reliability, correlation and regression through SPSS syntax
process. All questionnaires were measured on the 5-likert scale which is universal
scale for the data collection.
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IBT JOURNAL OF BUSINESS STUDIES (IBT-JBS) Volume 16 Issue 1, 2020
4) RESULTS AND INTERPRETATION
Table 1: Gender
Frequency Percent Cumulative Percent
Male 67 95.7 95.7
Valid Female 3 4.3 100.0
Total 70 100.0
This above Table 1 shows that 67(95.7%) respondents are male, and 3(4.3%)
respondents are females. The low female percentage as compare to male indicate
that some social or cultural factor influence on female job. In addition, Azad
Kashmir is male dominant society that is also reason for the large respondents were
males.
Table 2: Experience
Frequency Percent Cumulative Percent
1-5 45 64.3 64.3
Valid 6-10 25 35.7 100.0
Total 70 100.0
The above Table 2 states that 45(64.3%) of the participants have experience
between 1-10 years and 25(35.7%) had 6-10 years’ experience in the banking field.
Therefore, majority of the respondents were new in the banking field.
Table 3: Designation
Frequency Percent Cumulative Percent
Operational Manager 38 54.3 54.3
Branch Manager 30 42.9 97.1
Valid Senior Risk manager 1 1.4 98.6
Bank Practitioners 1 1.4 100.0
Total 70 100.0
The above Table 3 illustrate that designation of participants 38(54.3%) were
operational manager, 30(42.9%) were branch managers, 1(1.4%) was senior risk
management officer and 1(1.4%) was bank practitioner. Results shows that most of
the respondents were operational and branch manager.
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Table 4: Reliability Analysis
Variables Cronbach’s Alpha No of Items
Risk Identification
.777 5
Understanding risks .711 7
.851 6
Risk Monitoring .767 7
.735 8
Risk Assessment
.858 7
Managerial Skills
Managerial Competency .842 10
Bank’s Performance
This Table 4 illustrates reliability analysis, which indicates the internal consistency
is good between substantive variables. Results illustrated that the risk identification
scale has 0.777, Understanding risk has 0.711, risk monitoring has 0.851, risk
assessment has 0.767, managerial skills, managerial competency, managerial
experience and organizational performance has 0.735, 0.858, 0.768 and 0.842
internal consistency respectively. All above variable’s value are ≥ 0.70, which
shows all variables are internally consistent. Nunnally (1978), suggested the value
≥ 0.70 is acceptable for basic research and internal consistency between 0.90-0.95
in major decision making consider excellent.
Table 5: Correlation Analysis
UR RI RA RM MS MC BP
UR 1
RI .541** 1
RA .584** .596** 1
RM .056 .021 -.125 1
MS -.232 -.176 -.117 .180 1
MC .085 -.094 -.175 .221 .076 1
BP .077 -.154 -.077 -.177 -.065 .757** 1
**. Correlation is significant at the 0.01 level (2-tailed).
The above Table 5 represents the relationship between variables. This analysis
shows two things first is strength and second is direction. Strength shows how
much close to one and directions shows positive or negative association between
variables. There is no link between both variable when value = 0, weak relationship
when value lies between ±0- 0.3, moderate relationship when values lies between
± 0.3-0.7 and strong relationship when value lies between ± 0.7-1 (Ratner, 2009).
There is moderate association between understanding risk, risk identification and
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IBT JOURNAL OF BUSINESS STUDIES (IBT-JBS) Volume 16 Issue 1, 2020
assessment, and low link between managerial skills, competency and experience.
Table 6: Moderation Analysis
Model Summary
R R-square F df1 df2 p
.512 .262 21.017 3.000 299.000 .000
Model Coefficient SE t p
CONSTANT 1.399 0.105 13.324 .000
ME (M) 0.656 0.122 5.377 .002
ERM (X) 0.759 0.083 9.145 .000
INT_1 0.345 0.112 3.080 .003
Interactions: int_1 = ME xERM
Outcome Variable: OP (Y)
The above Table 6 indicates consequences of moderation analysis recommended.
In this considered method, regression analysis is done by utilizing SPSS Syntax
Process. Result of Risk Management Practices (X) shows significant association with
Organization Performance (Y) (Coefficient. 0.759, p<0.05). Managerial Expertise
(M) and Organization Performance (Y) has significant relationship (Coefficient.
0.656, p>0.05) and Interaction term (ME x ERM) is significant (Coefficient. 0.345,
p<0.05). Based on results, we can say that Managerial Expertise is playing vital
role as moderating variable in this model. Therefore, we can conclude that our
finding support moderation of Managerial Expertise between Risk Management
Practices and Organization Performance.
5) DISCUSSION
From the results of descriptive statistics, a large percentage of working staff in AJ&K
is male. There are many reasons, such as AJ&K is male dominant areas as well as
due to cultural implications female are mostly not allowed to work in banking sector.
These results are coherent with the results of (Ghulam et al., 2019). The findings
of our research study further elaborate that risk identification, understanding
risks, risk monitoring, risk assessment, managerial skills, managerial competency,
organization performance are consistent on concrete basis as internal reliability is
within the threshold value. We can reveal with the results that demographic analysis
can be a vital difference to influence Risk Management Practices shows significant
association with Organization Performance.
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Therefore, these variables as considered as sound for this research results and
inferences can be drawn. Our analysis of correlation of variable show consistency
with range of correlation values. As per results of correlation values, all variables
are depicting moderate association as well as somehow low link between variables.
these correlation results are coherent with the results of (Wu & Wu, 2014).
According to results of Moderation Analysis, Risk Management Practices shows
significant association with Organization Performance. Managerial Expertise
and Organization Performance has significant relationship Interaction term is
significant. Risk Management Practices should be dealt in very serious manner as
it has much significant association with Organization Performance.
5.1) CONCLUSION
Worth sharing results illustrate that risk management practices can improve
organization performance which is very essential for long-term benefits. This study
also shows that managerial expertise (Managerial skills, Managerial competency
and Managerial Experience) can also influence on the organizational performance
significantly. Management of the banks has managerial expertise in the specific
field, which is beneficial for organization to reduce risk exposure.
Based on results and observation we recommended organizations should need to
focus on risk management practices as well as managerial expertise to improve
organizational performance which necessary for organizational life and to get
competitive advantage. We can increase managerial expertise through on job training
or off job training. As we know that risk management practice has positive impact
on performance of bank. Result of study also similar with the studies of (Girangwa
et al., 2020; Rehman & Anwar, 2019). Study also found that the moderating role of
managerial expertise also playing significant role. This study employed moderating
role between the ERM practices and bank’s performance which is the uniqueness
and contribution of the study.
5.2) RECOMMENDATION
Recommending was made based on results of study. Managers of the banks should
focus on the ERM practices for managing the risks on daily basis. Researchers stated
that any kind of strategy you can used but the risk management is complementary.
While managing risk managerial expertise is necessary for performance of
banks, which is associated with the daily operations. Study recommended that
the managerial expertise can plays as competitive advantage for the banks. Study
also recommended that the banks should focus on training and development of
employees, which plays crucial roles for the banks.
5.3) LIMITATION AND FUTURE SUGGESTION
Present study has limitation likes prior studies. The major limitation of this study is
sample size is small and cross-sectional approach which might be has some impact
on the generalizability of the study. We suggested to future scholars to conduct
study to examine comparison between Islamic and conventional banks to determine
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IBT JOURNAL OF BUSINESS STUDIES (IBT-JBS) Volume 16 Issue 1, 2020
which bank’s management have high managerial expertise. This study conducted
on the organization such as insurance companies. Future study may conduct to
take other component to measure managerial expertise. Future study should be
conducted with longitudinal approach and new dimension should be used for
managerial expertise.
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